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Jason and Will are joined by Andrew Wang, CEO of Valon, who leads us through the intricate inner-workings of mortgage servicing industry. Home ownership and therefore mortgages are a staple of American life. The average homeowner in the US has nearly 80% of their net worth tied to their home’s value. While much attention is paid to mortgage origination—the initial loan—mortgage payments need to be collected over 10, 20, and 30 years. That is the role of mortgage servicing—a surprisingly critical role in the stability of the US economy as the Great Financial Crisis pulled into sharp relief.
In this episode, Andrew breaks down the evolution of mortgaging services over the years, from its origins in the post-depression era, to the impact of the 2008 financial crisis. We also discuss the industry’s structural composition and incumbent players who have been unable or unwilling to keep up with the pace of modern innovation. Valon taken a holistic and homeowner-centric view of the world, leading them to new and exciting opportunities to not only improve the mortgage servicing experience but also homeownership itself.
Welcome to the Perfectly Boring Podcast, a show where we talk to the people transforming the world's most boring industries. On each podcast, we will be sitting down with executives, investors, and entrepreneurs to talk about the boring industries they operate in and the exciting businesses they’ve built.
Strap in for the most marvelously mundane ride of your life.
Jason: Welcome to the Perfectly Boring podcast. Today we have Andrew Wang, CEO of Valon, on the show, and today we’re taking on the topic of mortgage servicing. So quickly, what is mortgage servicing?
Well, a mortgage is obviously a loan for a home. And mortgage servicing is the institutions that actually take care of paying off that loan over the 10-, 20-, 30-year timeline. So, that digital interface where you pay your bill, et cetera, that is not always your originating bank. And Andrew is building a fascinating business in this space. We learned a lot about the mortgage, the evolution of the mortgage servicing space over time, the impact of the great financial crisis, and the interesting approach Valon is taken, not only just with technology, but changing the relationship with the end customer. So, what were some of the interesting touch points that we got during the conversation, Will?
Will: It was a really wild discussion because I started with a fairly preliminary understanding of what mortgage servicing was. And in part of the wind up that listeners are going to get an opportunity to hear, Andrew really gives us a perspective as to how critical mortgage servicing is to the underlying health of the US, and therefore global, economy, and how much of an afterthought mortgage servicing has historically been, and why that should not necessarily be the case, and why now is the, sort of, unique moment in time to be able to use advanced technology and a reorganization of the overall stack for mortgage servicing to bring a better product to market for both consumers, for originators, for investors, and for regulators. And so, I mean, really badass discussion, really cool company, a space most people never think about, definitely a boring space, but with a just immense amount of value to be created.
Jason: Yeah, and hopefully our listeners go through kind of the same increase in excitement that I had during the conversation, which is you kind of over time just realize this entire industry of mortgage servicing, not only is it critical, but how much they’re missing the actual point which is, if you really just focus on the homeowner and creating a great experience for them, this is a huge relationship, it’s a multi-decade relationship, and there’s probably not just one product you can offer them. But they’re stuck in the staid and stodgy technology of yore, and haven’t been able to move as quickly and break through to open that aperture and open that relationship with their customer. So, before we get too deep into the weeds, let’s just jump into the interview. Here’s Andrew.
Will: Andrew Wang, founder and CEO of Valon, thank you for being on the podcast with us today to talk about the very boring, very large industry of mortgage servicing. For the benefit of our listeners, it would be good to start at a really high level and give people kind of a baseline for what mortgage servicing is, and maybe a little just on the history of the mortgage servicing industry, you know, before we dive in a little bit on the specifics of your background and Valon.
Andrew: So, mortgage servicing is a sort of pervasive thing that exists throughout the mortgage ecosystem and in the lives of most American homeowners, but it is also just not very well understood in terms of the dynamics that are involved with mortgage servicing in terms of who’s involved, how they’re involved, and exactly what they do. But again, nonetheless, it’s something where it’s within every part of the mortgage ecosystem today. But to give you some background on mortgages and how mortgage servicing even is a real thing, let me first talk about the mortgage industry as a whole. When you think about the mortgage industry, it’s obviously a very large component of the American economy today. When people look at it, they say, “Hey, 20% of GDP in terms of housing,” something that the US government often uses in order to boost spending; they lower our mortgage rates in order to cause people to have more savings and then spend on other things. It’s just a very, very core piece of the American ecosystem.
But it actually came into play really, during the depression, the Great Depression, were effectively pre the Great Depression, mortgages weren’t really regulated all that much, and as a result, there were kind of weird, funky structures, even crazier than what people saw in 2007. And as a result of that and as a result of all these people who weren’t able to pay their mortgages due to these balloon loans being in place, which are basically loans that don’t amortize, and basically become due and payable at a certain point in time, what the US government did as a function of the New Deal was put these government institutions into place to create more affordable housing structures, to create these institutions who would really regulate the housing market, or really add liquidity into the housing market so Americans could actually own a home.
Will: And that kicked off the current, almost philosophical ideal that we have today about homeownership kind of being the epitome of the American dream. This was—the mortgage was almost an invention to bring that to fruition after World War Two?
Andrew: That’s exactly right. So, after World War Two, it became more and more core to the American dream. When everybody talks about, “Hey, what is the American dream?” It’s obviously being able to get further in life based on your own merits, it’s about owning a home, and starting a family, building a community, all of those different things, and the home is just so central to that dream. But exactly to your point, it started from post-World War Two.
By the 1990s, it became such a large component of how the US economy even functioned and worked that there was more and more so this focus on affordable housing, putting people in homes, putting people in sort of a structure that creates the ability, creates stronger communities, and create a more robust ecosystem within cities, within neighborhoods, and everything else. So, that’s how mortgages became so intertwined in the American system versus, you know, other countries, which may have relatively high homeownership rates, but just not nearly as high as the United States. That’s, like, the genesis of how mortgages became a big component of it. The mortgage servicing aspect of it actually wasn’t as relevant of a thing, that became more of a thing, actually, after the great financial crisis, the GFC. So pre-2008, what ended up happening was actually that most people when they got a mortgage were serviced by the same people who gave them that mortgage. So, you had Countrywide, you had some of these older institutions which have since gone bankrupt or have been acquired by more older financial institutions, servicing the mortgages. So, it wasn’t really a separate thing, for the most part, at that point in time, and it wasn’t really an important topic, actually.
Jason: Before we go too deep, maybe you can define servicing. Like, how does that show up in the average American’s life? What is servicing when it comes to an individual?
Andrew: So, mortgage servicing specifically is what happens right after you get a new mortgage. So, when you get a new mortgage, you go to your originator. It can be someone who works at a bank, it could be mortgage broker that is a family friend of yours, it could be someone on Main Street who has a sign out that says, “I’m a mortgage lender. Come inquire about rates.” Once you get that mortgage from them, you have to make the payments back because you’ve got the mortgage to buy your home.
That entire process of making those payments and the institution that you make those payments towards, that is the mortgage servicer. Now, when you look at that very simply, that is similar to a debt collection agency where you’re effectively making payments, they’re collecting on the debt and they’re making those payments back to the person who made that mortgage. Now, what’s actually more complex about mortgage servicing, as opposed to normal general debt collection is the fact that one, there’s a lot of more regulation associated with it, right, because there is a home involved, and there’s a lot of regulation around how you deal with homes; there’s a second component which is, as per the government agencies and as per many state regulatory agencies, you are considered the trusted financial advisor to the homeowner along the homeownership journey. So, when a homeowner says, “Hey, I’m unable to make a payment; I need some help,” the mortgage servicer isn’t allowed to just say, “I don’t care. Deal with it,” they’re often required to go through all these interactive processes to make sure that the homeowner can actually get the right solution and continue owning their home.
Long story short, just jumping quickly back to what we were just talking about, it’s really core, and part of the thesis, really, of the American economy that they want to keep people in homes, they want to keep people getting homes, increase the homeownership rate, make it part of the American dream. So, what they did was they made mortgage servicers responsible for keeping people in homes.
Jason: Gotcha. And this was on the back of the great financial crisis?
Andrew: Correct. Actually, it was there before but what I was trying to really get into was that pre the great financial crisis, it wasn’t as really hot of a topic because homes were honestly increasing prices all the time; anyone who bought a home basically made money on their home, so just not really a big worry throughout the entire ecosystem. So, when people thought about mortgage servicing back then, it existed but it wasn’t really a concern. It wasn’t a focus of both regulators, politicians, really anyone in the entire ecosystem. But when the great financial crisis happened, what ended up happening was, well, people weren’t able to get out of their homes, they weren’t able to pay for their homes, their homes were less valuable than the mortgage that they took out.
And as I mentioned just right now, the mortgage servicing process is actually also the process of helping the homeowner stay in that home. And that’s why home mortgage servicing became such a large topic and became such a large focus because post the great financial crisis, it became all about making sure that people who took out these mortgages were able to put themselves in a position where they were able to keep their homes. Obviously, there was a lot of difficulty with respect to it. Obviously, there were a lot of people who were unable to actually pay for their mortgages on an ongoing basis, so there were a lot of what’s called modifications, basically changes to the underlying mortgage in order to make it affordable. But that entire ecosystem really exploded both from a regulatory scrutiny perspective, from the amount of activity that was happening in it because of the great financial crisis.
Jason: So Andrew, why does mortgage servicing even exist to begin with?
Andrew: Yeah. So, this is one of those really long archaic, sort of, pieces of knowledge that people have to understand the ecosystem, understand the history, understand all the different dynamics before they end up realizing why it’s even a piece of the entire pie. And if you look at other countries out there, like Great Britain, Asian countries where there’s tons of mortgages, as well—China, Japan—but mortgage servicing as a separate concept, it’s just not really a thing. So, it’s really, for the United States, a concept that is tied to Fannie, Freddie, FHA, VA—which are basically Ginnie—these government institutions. So, the long story short, but still very long story, is that when the government put these different institutions in place, they created a concept where basically the underlying person who they wanted to interact with the mortgage was still the originator.
So, I make a mortgage, my business isn’t to hold this mortgage because the government wants to buy the mortgage and make it more liquid, and therefore more people can make mortgages, and therefore the cost of a mortgage is lower, but I still want you to be the person who interacts with the homeowner. So, I want to split this concept out. I’m going to own the mortgage, you’re going to service the mortgage. And let’s stick with that for now. So, that was, like, phase one of it.
Then phase two of it was the fact that well, if that’s going to happen, then every single person who makes a mortgage needs to be able to service the mortgage, so that’s not fair to mom and pop shops across Main Street. If I originate whatever, 10, 20, 50, 100 mortgages a month, I’m not going to be at a place or a scale where I can run a true mortgage servicing operation. It just doesn’t work. So, how am I going to deal with it? So, the government, again, to try to incentivize mortgage lending to incentivize liquidity in the space, said, “Fine. You can sell that servicing to another guy who then will deal with the relationship.”
And boom, thus mortgage servicing is born, the idea of mortgage servicing is born, and this entire ecosystem then diverges. And really, not just diverges, it converges really to an efficient model of saying who is the best at mortgage servicing? Who are these cheap cost providers who are in the Midwest, who do it poorly, but thus can pay the highest price for mortgage servicing, and thus that’s where all of the capital and all of the assets, sort of, flow? And that’s why we live in the world we live in.
Will: So, servicing is kind of an afterthought for the majority of the existence of a mortgage industry at large. Until, ’08, ’09. In ’08, ’09, everybody starts fixating on the servicing process as what it should always have been looked at, which is this really critical interface between the borrower and the lender, to a degree. And as a part of all of the regulation and the ongoing focus on servicing during that period of time, as we almost reworked the entire housing market, the cost to serve as a mortgage also changed a lot. Maybe you could just touch on that because there are a lot of compliance and regulatory framework aimed at servicing actually dramatically increased the complexity of doing servicing, which I think had a pretty profound impact on the cost to do so, right?
Andrew: Yep. So, to elaborate further on these points that you’re mentioning, the mortgage servicing ecosystem was really underdeveloped, both from one technology perspective as well as an understanding perspective, pre-2008. Again, people were not really afraid of being able to pay mortgages because naturally whenever you couldn’t, you just sold your home and you probably made money on it. So, it’s debatable as to whether or not [unintelligible 00:14:48] people are fully compliant back then whether the cost of servicing would be higher, but nonetheless, it is based on the data that people can see in the financials of mortgage servicing companies. Mortgage servicing became extremely expensive and really double, tripled in costs post-2008.
And the way that it played out was basically the great financial crisis happened; people were unable to pay their mortgages; the traditional way would be to just put people out of homes, and as I mentioned earlier, the government’s very incentivized to keep people in homes. And in order to make sure that the servicers were doing the right things, they basically put a bunch of different regulations both on the federal level and the state level to ensure that mortgage servicers were following the right processes in order to determine whether or not someone could make a payment for the mortgage, make sure that they’re offered the right plans, and to make sure they were provided the right disclosures before they actually got through a process of foreclosing. So, when they put these regulations in place, normally you would think, “Well, these things can be somewhat automated. These things can be provided as part of the process.” But as I mentioned because it was so under-focused, there was just really not that much technology in the space, really not that many technological providers even involved in the industry.
There’s one main one, named Black Knight. So, when this all happened, these servicers went to Black Knight and basically asked them, “Hey, well, we are running into these issues. Can you help us?” And the answer was, quite frankly, “We will try, but we can’t really guarantee all that much to you because there’s a lot of changes, there’s a lot of code that needs to change, and we just can’t get it all done that quickly.” So, the only way that the mortgage servicers could handle these different regulatory requirements was basically to put people in place.
You basically replaced what you would like to use, or what like to get done with technology, with people. So, you basically have this explosion of people cost in the number of people required to service a mortgage, and basically got to a place where today, there’s two to three times as many people who need to be involved in a mortgage, versus pre-2008.
Jason: What does the actual structure and distribution of mortgage servicers look like today, and how has that changed since the great financial crisis?
Andrew: It’s one of the things that honestly, the government focuses a lot on. There’s a term, which is systematically relevant of financial institutions. So pre-2008, like I mentioned, there wasn’t really that much of a concept of mortgage servicing. There were mortgage servicers out there, but most of the servicing was still held by the originators who made the mortgages. So, as a function of that, the ownership and really the people or entities that were servicing the mortgages was distributed quite similarly to the origination volumes.
The guys who made the mortgages were the guys who serviced the mortgages, and as a result, there was a good split between bank who were very involved in mortgage space, as well as non-bank entities became more relevant, you know, probably post-2005. Today, we’ve gone into a world that is more and more non-bank-oriented, meaning the regulations have stepped up to such a dramatic degree that the underlying institutions who were originally involved had really substantially changed. I’ll give you some simple examples. CitiMortgage, one of the largest originators previously, still a very large originator probably top five, now no longer services its own mortgages. It’s completely outsourced—I think as of 2017—all of their mortgage servicing to Cenlar.
Similarly, US Bank is no longer servicing their mortgages. The folks at JPMorgan Chase, Jamie Dimon has, you know, publicly stated that they want to get out of this business and they’ve been working with other sub-servicers to slowly migrate to a place where they’re not servicing their mortgages anymore. So today, you are in a world now, where it’s basically 70% non-bank dominated versus pre-2008, we were in a world that was probably 70% bank dominated.
Jason: You’re painted a really stark picture of an increasingly disjointed, highly regulated, under-digitized, mortgage servicing market. This sets the table really well, I’m sure, to start to talk about how you’re changing those dynamics with Valon. But before we dive into the company, maybe you can give us a bit of background as to how you personally got involved with mortgage servicing to begin with.
Andrew: I like to coin—or use the term that I am an accidental operator because my background is actually on the investment side. I started out, really, in my career focusing on investing in some of these legacy mortgages. So, my first job out of college was working at Goldman. I was on what’s called the short-term products [unintelligible 00:19:24], did some stuff with mortgages, I did some stuff with aircraft, but I quickly moved over to a Soros Fund Management where my primary job was actually to look at mortgages. So, I started out actually looking at the legacy, what’s called non-agency residential mortgage-backed securities, and looking at the data underneath and seeing what was going on with these mortgages.
Naturally, as with much of the market, we went from buying these securities to a place where we started buying the underlying home loans, the actual mortgages as opposed to the securities that you can buy on an exchange. And as a function of that, I ended up having to work with the servicers because when you buy the whole loan, unlike a security where everything’s packaged up for you, you don’t have to think about the accounting, the servicing, whatever else, when you buy the whole loan, you have to go find the guy who’s selling the whole loan, you got to understand what he’s doing, so he’s not selling us stuff that you didn’t want to buy, he’s running the processes the right way, and you also have to go work with the servicer to actually get the servicing to happen, because it’s a licensed activity. So unsurprisingly, the way I got about it was I started calling all my friends who had owned whole-loan portfolios before, and I asked them, “Who do you guys work with? Who should I be talking to you?” And the answer was, very simply, “They all suck.” Like, nobody likes your servicer.
Now, you would think that would be an answer purely from one perspective, one angle like it’d be the perspective of an investor, maybe they charge too much. But it turns out it’s because they aren’t liked by the consumer, extremely low NPS scores of on average about 16; they aren’t liked by their investors, they’re extremely commoditized and extremely poor customer service, and they’re most certainly not liked by the regulators who just keep fining them over and over again. You search mortgage servicing [unintelligible 00:21:07], you basically have, like, thousands of pages about this. And it’s still even happening today. And it’s not even entities that, you know, are foreign and pretty small and not understood; it’s even large institutions like Citibank which is—like I said—why they got out of mortgage servicing.
So naturally, my view on it was, well, this seems like something that technology can solve. This is something that we should be able to do better. This seemed insane that in the 21st century, that we’re still dealing with this type of stuff. But as you start to dig in more and you start to pry into the actual underlying business, you start to understand both the complexities from an execution perspective and the actual underlying technological challenges. So, I ended up trying to find a couple of venture companies to invest in to go do this, but I actually couldn’t find anyone who had the right idea, the right setup, the right vision in terms of how to build this company.
So, you know, I went about my way, kind of left this on the side, and focused on other things at the time. But actually came back to it when I started looking at mortgage servicing rights which, at the time, I didn’t understand nearly as well because I bought what are called whole loan mortgages, this entire mortgage. Mortgage servicing rights are basically the contractual relationship between the person who owns the right to service the mortgage—like I said, to collect, to interact, to really deal with the data of the mortgage borrower—and the person who actually services the mortgage. So, it’s the contractual right that allows you to sub-service a mortgage out. What’s interesting about that is that is basically a way to own that relationship and contract that relationship long-term.
And for me, as someone who had started looking more and more into FinTech, the way I sort of saw it was, here is a way and here is an asset class, and here’s a space that actually allows the mortgage servicer to own these relationships and do have these long, sticky monthly engagement type relationships that they can have over 7, 10, 30 years. And that’s a very unique thing to have. More importantly and most interestingly, it’s in a situation where actually in this ecosystem, people pay you to own that relationship, people pay you monthly fees to say, “Hey, actually work with the borrower. Hey, actually interact with them, help them find what they need, whatever else, and we’ll pay to do it, and you’re allowed to market additional things to them.” So, to me, that seems like such an interesting situation because not only can you have a business that is built to really improve the margins of the business and build automation around it, but you have this sticky relationship with the homeowner that you can really use to build trust, and really sell future financial products to.
And that just seems like a very interesting business in my mind. So ultimately, I decided, hey, investing is interesting but this seems like too big of an opportunity to give up. So, I decided I wanted to go start a business, and this was the business I started, you know, right after.
Jason: And one of the most interesting things to me is that it’s not just a software component, right? Because you had looked at a number of other software providers and decided to do something a little bit more full-stack, which we don’t typically see in the venture space. People tend to just want the software component and tend to steer clear of the services component. Maybe you can talk a little bit about why you still decided to include services as a part of what Valon offers.
Andrew: There’s an understanding amongst most venture investors that you want to be in the software business because it has a high margin business, it’s defensible business, and it’s less subject to changes in terms of margin profile because of the large amount of margin you have. Which, you know, is understandable. And that’s ultimately actually where we thought we were going to get to, until we dug into and, sort of, operating this business, the actual origin of starting a mortgage servicing company as opposed to just the technology company was the fact that we realized that existing players were hamstrung by their current software in such a crazy degree that they weren’t even able to migrate off of their existing systems to a new system. It’s also a super-regulated space so anybody who wants to do it, wanted or needed to see clear performance, clear audits, really regulatory buy-in before they even made those things. So, it actually started out originally as an execution [ploy 00:25:31] where we said, “Well, we can execute faster, we can learn faster, we can dogfood our own product so much faster, and come back to people later on once we’ve been able to show these numbers.”
But as we started doing this business more and more, we began to further understand that there’s actually a really, really great opportunity running the mortgage servicer because you have that direct customer relationship. And that’s such a valuable thing because even if we had automated all of the backend processes and even if we were focused on just making these margins more efficient, it’s not really fundamentally changing how the borrower perceives it. It’s changing the financial profile of these businesses. And additionally, a lot of the things that we wanted to do was build trust, and that’s a front-facing thing; that’s something that you need to be invested in as a business, which a lot of the existing mortgage servicers didn’t have that perspective and that view. So, for us, it became more and more of a consumer story versus an enterprise SaaS story where we can say, “Hey, not only can we get this cash flow machine by doing servicing well and build really good software around it, but we can really build a great partnership with the homeowners that are being serviced by us and really build longer-term relationships with them.” So, that’s where I think the turning point change from, “Hey, we’re doing this out of necessity,” to, “Hey, we’re doing this because we think it’s the best thing we can be doing for people.”
Jason: I love also that because the existing system isn’t able to migrate off, their slow and outdated solutions and they’re a highly fragmented space, it’s effectively a commodity; you can come in, build a whole new tech stack, still put humans against the problem, but undercut on price. But you kind of used that extra cost as a way to broker a relationship directly with the consumer and offer a more expansive and holistic product over decades, which is a fascinating inversion of what the traditional mortgage servicing mantra and MO is. Maybe you can talk to us about how you actually convinced the originators and loan purchasers, mortgage purchasers, to trust you and your new small startup to actually service those loans? Because it feels like a difficult business to really get your foot in the door and get those initial loans through the platform so that you can build that trust with the originators and the loan owners as well.
Andrew: To your exact point, it’s a business that’s extremely difficult to get into, [again 00:27:52], a lot of regulatory scrutiny, there’s a lot of requirements to get into the business. And just name a couple here, you need—generally speaking—all 50 states licensed for you to be a quote-unquote, “Scaled servicer.” You need to have what’s called agency approval, Fannie and Freddie approval, to be able to service most mortgages in the United States. So, between those different aspects, it’s really hard to even get the legal requirements to be involved in this business, let alone get commercial contracts.
But the way we approached this was really two-fold. The first part of it is, we were fortunate going into this space knowing that the existing players were so bad and so commoditized that actually, people were willing to work with different servicers. I’ll give you a really simple example here: there’s a company out there that we partnered with, it was one of our big investors, it’s called to NRZ, and they’re one of the largest owners of these mortgage assets. They own, like, 7% of the entire market. They own their own servicer, it’s called Shellpoint.
But even as an owner of that servicer, they don’t actually give all of their business to their own business. And that’s because they’re trying to keep them competitive, that’s because they’re trying to diversify their risks, but the very fact that they don’t give all their business to the entity that they are most financially incentivized to work with gives you a little bit of insight into how everybody thinks about this space, which is, “I’m not married to my vendor. I’m going to work with anybody who seems to be better. And there’s a lot of things that are lacking, so you can try to convince me in a variety of different perspectives.” Obviously, if you’ve increase the bar because you’ve improved everything, that will no longer be the case, but today as it stands, that’s how the ecosystem works.
The second part of it, which is we actually went into this knowing that if we need these portfolios, we don’t want to just have to convince people, we want to guarantees. So, we actually made sure that the initial investors in this company, the people who would take the benefits and the fruits of the technology that we built are some of the largest players in the space. So, we actually got folks like for example, Soros, NRZ, Jefferies, and a couple of other guys later on, to invest in the company with the belief that, “Hey, if I give you some mortgages to service and you actually are able to improve these margins, our business will be that much better off for it.” In some sense, they view this as, “Hey, this is an outsourced R&D effort. We can’t hire good enough technical talent internally; we’ll give you guys that through an equity investment, and if you guys win, we also win.”
If you think about it as an example, NRZ spends something like, eh, on order of a billion dollars a year on servicing fees. If we can truly save them 10% on it and give that back to them—and let’s say we save more than that, but we’re just getting ten—well, that’s $100 million a year that they’re saving. And the way that their investments, or really their fund is really valued, that’s a billion dollars of value that was just created. So, that’s what’s so interesting about this space which is, you have these players who are very incentivized for our success and we just made sure that we went to them very early on and said, “Hey, we’re going to get this done. This is a very low risk for you; we’re going to ask for a small portfolio, but if you give it to us and we succeed, we can both be big winners at the end of the day.” It’s really about incentive alignment.
Will: Andrew, I think one of the more profound things that you brought up here is that you’re being paid to have a direct relationship with a consumer, a home-owning consumer, and that historically, I think mortgage servicers were happy being collection agents and not thinking about the long-term relationship that they had with the consumer, thinking about themselves as a commodity. How do you think about the relationship that you have with a consumer over the arc of your relationship with them and the types of products and services that you can start to bolt onto that relationship?
Andrew: This is a really crucial point for us as a business, which is fundamentally and philosophically different from preexisting and the incumbent mortgage servicers. So today, the way people view this industry is that they view the extraction of value from the consumer as how they are still in business, the way that they generate margin. Meaning if there’s a way I can extract an extra dollar from the consumer, for example, if I charge them a fee for making a payment online or for convenience, that’s how they are continuing to make profits. Which is a very foreign and crazy concept, obviously, for people who are in venture and tech, et cetera. We take the approach that we want everything that we can do to make the consumer happier.
a happier customer and investment towards making their experience better is how we actually make money. Because if you remember, at the outset, we don’t actually make money from the consumer directly; we make money from servicing mortgages. And to us, the most efficient way to service the mortgage is a borrower who wants to use our automated products, who trusts us, and who doesn’t call us with a lot of difficult questions. So, to do that, you have to really make sure you do everything right for the consumer so they are willing to trust you with that large financial ticket item that is their home. Now, I’ll give you a couple of cool examples as to what you can do if you’re a mortgage servicer who’s really focused this way.
So, really simple example; today, a lot of homeowners actually don’t even use autopay, and you get a variety of different explanations. One of the really good explanations is that many people actually have lumpy incomes, so they don’t really know when they’ll get paid. Now, they want to use autopay, but the problem is because they don’t know when they’ll actually get paid, they need to make sure that they’re paying when there’s money in their bank. They don’t want NSF fees, they don’t want overdraft fees. We can use integrations with folks like Plaid to check their bank account and make sure that they have enough funds in their bank account before we pull, basically guarantee to them that you’ll never get these type of fees.
Now, that increases the convenience for the homeowner and allows them to put themselves on autopay, reduces actually for us the amount of times we have a call to make sure that they remembered to pay, and then overall, it actually results in a situation where we save more money and thus we make more profits at the end of the day. That’s a really, really simple example.
Another deeper layer you could go for example would be to tell people, “Hey, instead of just paying your mortgage through bill pay or whatever else that you’re using, why don’t you set up autopay and when you set up autopay will take $1 every time you use autopay and we’ll actually pay it towards the next delinquent borrower.” Meaning it’s a charitable donation; we’re taking money out of our pockets to pay a delinquent borrower. Now, that doesn’t seem like a big impact when you just think about the dollar, but when you think about the percentage of people who are current, and then people all do this, we actually can generate enough money that we can donate to delinquent borrowers. It actually reduces our overall delinquency rate and therefore our overall costs as a mortgage servicing company. That’s virtually unheard of.
Lower delinquency rates look better for agencies, for regulators, for investors, and we can do in a way which really doesn’t take any money out of our own pockets, it just reduces costs because we’re servicing with a lower friction way, but actually generates a lot of goodwill with the homeowner. Which then leads us into the second part, which is, well, we can actually cause people to stay on our platform because as the servicer, we actually can offer them the lowest rate possible. If you look at a world that we service the mortgage as well as originate, we don’t care that much about making money on originations because we own the consumer, we own that relationship. And we know everything about them; we also have most of the information, so it’s easily preprocessable. Which means that we can go to the homeowner and say, “You know, you’re usually going to try to refinance right now, but I’ll give you the best rate because I have zero marketing costs, and I just want to keep working with you.”
So, you don’t even need to shop with everybody else because I’m going to preload it, I’m going to give you the best rate, and you’re going to have a very smooth origination process and servicing process because nothing will move off. So, you get more and more into these type of conversations around, hey, because of our relationship, because of the trust we build, we can offer people more and more products that honestly make them happier, and ultimately that will drive them towards using us more longer-term, which is exactly what we want. And that’s what we find so interesting about the mortgage servicing space because while it’s not understood this way today, it is the perfect setup to be in a situation where you’re really building a long-term financial platform, and the mortgage is that linchpin to getting into that consumers life and really trying to build that trust relationship with them long-term.
Jason: I’ve got to imagine the regulators absolutely love what you’re doing. I’m curious if you’re thinking through feeding that data loop back into the regulators because I can’t imagine the regulation has gone down since a great financial crisis. I’m curious what relationship you have with the government on this front.
Andrew: So, our relationship is primarily with the agencies. When you think about regulators, there are regulators who are the state regulators—they manage their own department of financial services in each state—there’s obviously the CFPB, and then there’s Fannie and Freddie who are called regulators, but really they’re investors by and really regulate the mortgage market through their buying of mortgages. But from Fannie and Freddie’s perspective, yeah, this is—you hit the nail on the head; this is exactly what they want, this is what they’ve been seeking for. When you look up on Fanny’s website, “Hey, what is a servicer?” They literally write, “Trusted financial advisor.” That’s what they want.
But nobody does it today, and there’s not much that they can do about it. So, from their perspective, they love this outcome where the servicer is thinking about this; they love an outcome where if the homeowner gets a stay with their originator, they have that continuity of relationship; and then they lastly love the outcome where if we are providing this platform on a greater scale, they then don’t have to worry as much about the volatility of earnings for originators because they have this blended financial profile. It basically turns in originator from a company that basically has highs and lows based on how much origination is happening to a customer relationship management company. And that is honestly where they want this stuff to go long-term.
Jason: And do individual homeowners get any say in the decision on who gets to service their mortgage? Or is it entirely up to the originals?
Andrew: Unfortunately, it’s buried on page whatever—probably, like, ten—on your closing disclosure, and then later on your mortgage documents, you get put to whoever your mortgage originator wants you to be serviced by.
Jason: So, the way you’ll… [laugh] coming into a home near you will be through your success with the people who are originating the mortgages and paying for that mortgage servicing contract?
Andrew: Today, that is the case, but in very short order, by the end of the year, you can get a Valon mortgage. And when you’re with Valon, you stay with Valon. We won’t sell your mortgage, we’ll keep your mortgage on our platform, and we’ll build that long-term trust-based relationship with you.
Jason: Tell us more about that.
Andrew: Yeah, so we—I mean, we would love for a world—and this is something, by the way, plenty of people have gripes about where they want to be able to have a mortgage that they transfer the servicing based on their own discretion, based on who they want to work with, but that’s a longer-term conversation, that’s a highly regulator-based conversation. So, it’s something that’s not going to happen tomorrow. The easiest way that we can become partners with people who actually want to work with Valon is that we offer them a highly competitive mortgage. Again, the fact of the matter is, we don’t need to make money off of mortgage origination; we make money off of having the consumer stay with us. So, we’ll be happy to offer them possibly the lowest rates that they can get.
So, when they come to Valon, they can get their mortgage refinanced, or if they’re getting a new mortgage, they can just get a mortgage from Valon, and then thereafter, they’ll continue to stay with Valon. There’ll be serviced by Valon, when rates drop, we’ll just be proactive and we’ll preempt any sort of refinance that they want to do. They can log onto our webpage, they can log onto their app, and they will exactly know how much they can refinance it for, what the costs are, all those different things. But again, the nice part here is because we don’t really need to make money on originations, like a Quicken, like a [loanDepot 00:40:13], or any of these other players out there—even Better Mortgage—they know that we have an incentive just to keep them on a platform and we can offer that lowest rate. And we can do that. So, that’s what’s so unique about it which is, you get that relationship, you get that great service, but you also get really priced competitive results, which we believe ultimately will build longer-term trust.
Jason: I mean, it’s an amazing and powerful refocus where you’ve effectively created alignment with all the major players in such a way that’s made it difficult for any other competitors to compete with you. It’s a pretty [laugh] amazing approach to the market that you’ve developed here. What gets you most excited about the future? Like wh—you know, obviously, you’ve got origination coming up; you know, in five, ten years, if you’re massively successful, what’s the impact you’ve had on the US economy and the US mortgage space?
Andrew: So, there’s obviously elements where we’re helping consumers, right, so we can reduce the delinquencies in the system, like I mentioned, through different mechanisms. We offer people really cheaper financial products, which we believe they deserve, but I think the long-term most impactful thing is that we can provide, really, researchers as well as government regulators the right tools to make the right decisions. When you think about what basically happened recently with COVID, now the government went about and offered everybody forbearance, which is extremely expensive for both players in the industry as well as the government, but they don’t really have a good way to address the crisis at hand. So, they used the very blunt-edged solution to it. As the platform that hopefully ends up winning the market, we can provide that information to the government; we can provide that implementation to them.
So, they can be much more, with a sharp knife and really a small pencil, start to draw exactly what they want to end up happening. So, instead of giving a forbearance for every single person—which is what happened; they said, “You didn’t have to pay a mortgage for nine months, twelve months,” instead of giving a forbearance to every person out there, you could say, “Let me check your bank account. Let me see that you’re actually running into a crisis. And if you are, actually I will give you even longer. I will give you 18 months, I will give you until you figure out what to do next.”
And for the people who didn’t actually have a crisis, we’re not going to give it to you. So, you actually can help the right people in this sort of situation. Alternatively, you might have a situation where the government wants to test a different modification program. Usually, it gets into a large argument about does this work; does it not work? There’s not much data out there.
But with a technological platform like us, you can actually go as far as to say, let’s actually A/B test these results. If the government buys-in will test it with [unintelligible 00:42:54] portfolios, and we’ll report these results. So, this is kind of where we believe government policy and really, American policy around housing can be really shaped if you had the right system and the right sort of infrastructure. So, while we are very focused on trying to build that long-term vision and build out a trust relationship with homeowners across the United States, we believe the longer-term impacts of doing something like this really come from the fact that we can leverage this infrastructure to help so many different people.
Will: Aside from going deeper in the value chain on the mortgage lifecycle, are their orthogonal products—I know before we jumped on the call, we were sort of talking about insurance a little bit—are there other orthogonal products that are correlated to homeowners that from a product standpoint that you see Valon being able to bolt on to the platform over time?
Andrew: I think the big new products that we’ll be focused on outside of insurance as an example that we talked about where offering property insurance is a very natural next step, which we’re already going to look to do by the end of this year is actually getting into things like for example, credit card debt consolidation. So, it’s a very well-known thing that people when they get credit card debt sometimes want to refinance it with a HELOC because it’s cheaper to pay a HELOC than a credit card. Now, that’s not a very simple process today because getting a HELOC is a painful thing because you have to work with the servicer or you have to work with a HELOC originator. So, making it really easy where someone who has credit card debt, move it quickly over to their HELOC and pay less interest is obviously a quick next step. But that really actually speaks a lot more towards long-term financial management because again, we are dealing with such a large purchase and a large component of their daily—their monthly cash flows.
So, as we look to what we do going forward, there probably will be a lot more around financial literacy, financial advisory, around all these different components. And if we can build that trust really leading the homeowner to make these right decisions and being able to forecast for them different outcomes based on what they want to do. So, I’d say that’s probably the direction we’ll ultimately take with this business. We need some time to work on all the different sort of initiatives that we have, but we’re really hopeful that we can really make a difference here.
Will: Andrew, congratulations. This is an unbelievably badass business and a very, very boring, esoteric industry that you are transforming. We really, really appreciate you taking the time to hang with us today and to give our listeners a look inside the mortgage servicing industry.
Andrew: I appreciate it. Thanks for letting me talk. I went on a very, very long rant.
Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We’ll see you next time.